The Emerging Markets Report

Published September 14, 2020 | 2 min read

The Emerging Markets Report is a new monthly report where our experts sit down and discuss current trends, investment strategies, and government policies in emerging markets around the world. This month, Adam Cole, RBC’s Chief Currency Strategist, sat down with our three emerging markets strategists, Daniel Rico, Alvin Tan and Dasha Parkhomenko, to discuss quantitative easing in emerging markets.

Quantitative Easing (QE) is in the relatively early stages in emerging markets, who is doing QE and how are they doing it in your region?

Latin America

  • In Latin America, several Central Banks have implemented QE type measures in order to provide ample liquidity to stabilize the FX and credit markets.
  • Colombia and Chile started with modest QE programs, while Brazil changed the legal framework in May to allow for QE.
  • More recently, the discussion has focus on using Pension Funds resources as direct transfers to spenders while providing explicit government guarantees.
 

Asia

  • In Asia, Indonesia has been on the forefront of unconventional monetary policy, with Bank Indonesia purchasing government debt directly.
  • The consequence has been a weaker Indonesian rupiah in the third quarter after strong gains in the second quarter.
  • The Philippines has also been undertaking QE, though primarily through the secondary market. India too has dabbled in unconventional policies, though the RBI has not yet launched a QE program.
 

Europe and Africa

  • In EMEA, countries such as Turkey, South Africa, and Poland have introduced QE-type measures.
  • Poland has had one of the largest bond-buying programs across EM since the COVID-19 crisis started (~4.5% of 2019 GDP since the announcement in March).
  • In South Africa, the SARB has been strongly against QE to fund the government’s deficit, but if the country does not address its fiscal and growth issues, then questions/market concerns about whether the SARB will be forced to step in with a more aggressive bond-buying program are likely to rise.
 

What opportunities do you see for QE in the future? How do you think it will play out for currencies?

Latin America

  • This time not only Central Banks had to cut rates and inject liquidity into the markets either by buying Treasury or Corporate bonds or expanding liquidity facilities, but governments had to implement direct cash transfers to their citizens.
  • This year these stimulus have been funded by increasing international and local debt issuances or multilateral financing
  • However, the problem is, how sensitive the economic recovery of these countries will be to the necessary fiscal adjustment.
  • In our view, QE in EM and specially in Latam has opened a Pandora box that similarly to DM will be very hard to close and governments will have no other option except to continue to rely on Central Banks intervention for years to come.
  • Latin America countries will continue to face pressures on the exchange rate while the Central Banks will be forced to keep expanding the monetary base.
 

Asia

  • Indonesia's QE experiment has generally been seen as positive, with Indonesian bond yields declining and the rupiah holding onto most of its second quarter gains.
  • Bank Indonesia has policy credibility among foreign investors, though that reputation could start to wane if BI's "burden-sharing" arrangements were to continue well into next year.
  • India is likely to be the next Asian central bank to pursue QE. India’s limited fiscal space and elevated inflation have narrowed conventional policy options.
 

Europe and Africa

  • Despite the large scale of the bond-buying program in Poland, the Polish zloty has been quite resilient.
  • We think there are three potential factors behind its resiliency – (a) the program has been in coordination with the country’s fiscal response, (b) Poland will benefit from the EU Recovery Fund, and (c) June & July activity data releases have surprised to the upside.